Per se legal? The Eleventh Circuit Rejects FTC’s “Unlikely to Prevail” Antitrust Challenge to “Reverse Payment” Patent Settlements

By Meera El-Farhan

In F.T.C. v. Watson Pharmaceuticals, Inc., 677 F.3d 1298 (11th Cir. 2012) the U.S. Court of Appeals for the Eleventh Circuit rejected the Federal Trade Commission’s (“FTC”) antitrust challenge to “reverse payment” patent settlements. Under the terms of the “reverse payment” (or “pay-for-delay”) agreement, the patent owner of AndroGel, Solvay Pharmaceuticals, Inc. (“Solvay”), agreed to make over $20 million annual payments to the generic challengers Watson Pharmaceuticals, Inc., Par Pharmaceuticals, Inc., and Paddock Laboratories, Inc. In return, the generic challengers agreed to stay out of the market until 2015, unless another generic version was to enter the market before then.


The FTC brought suit against all parties to the agreement. The FTC challenged the “pay-for-delay” settlement on the basis of unfair restraint of trade (the settlement allegedly being an “unlawful agreement not to compete,” in violation of section 5(a) of the Federal Trade Commission Act[1] (“FTCA”)). The FTC argued that such monopolies allow both generic and patent holding pharmaceuticals to make more profits at the expense of consumer welfare (increasing drug costs by an estimated amount of $3.5 billion per year). On appeal, the FTC argued, among other things, that Solvay’s ‘894 patent [2] was “unlikely to prevail.” According to the FTC, because the patent was unlikely to bar Watson and Par, and Paddock’s generic drug from entering the market the settlement was an unlawful restraint on competition.

The Eleventh Circuit rejected the “more likely than not” standard contended for by FTC. The court held the “unlikely to prevail” standard to be insufficient to state a claim; thus, a patent did not thereby exceed its “exclusionary potential.” The court adhered to the test set-forth by its precedent: “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.”[3]

Although critics of the court’s decision argue such a test makes reverse payments “per se lawful” due to resulting difficulty in challenging reverse payment agreements, the Eleventh Circuit proffered convincing arguments for rejecting the FTC’s challenge. Among other things, the court argued FTC’s “predict-the-likely-outcome-that-never-came” approach would not only impose a retrospective burden on parties and courts (even if the burden of proof fell on the plaintiff), but also, such a test would not align with the strong public policy favoring settlements.

The court noted that parties settle patent litigations to “cap the cost” of litigation and avoid the “all or nothing” outcomes from courts. Settlements are one option for parties who “might not want to play the odds for the same reason that one likely to survive a game of Russian roulette might not want to take a turn.” The Eleventh Circuit further explained that the costly and tedious process of developing new drugs should also be supported by strong public policy favoring settlements over costly litigation. The court, with reference to the maxim “More Money, More Problems,” sided with pharmaceutical companies’ incentive to recoup costs of research and development. The court proffered additional reasons such as the exclusive appellate jurisdiction of the U.S. Court of Appeals for the Federal Circuit over patent cases and the court’s lack of expertise to rule on the patent.

The heart of resolving such cases, as noted by the Eleventh Court, is in striking the balance between antitrust law interests (promoting competition) and intellectual property law interests (allowing temporary monopolies to provide innovators with incentives to create). Antitrust laws aim to protect consumers from artificially high prices, maximize efficiency of the market, and also promote improvement of products through competition. On the other hand, granting patents ensures parties have the incentive to innovate in the first place. Although one can easily recognize the tensions between antitrust law and intellectual property law, one must also recognize the common goal: promoting innovation for a better future.

However, there is no consensus over resolving this tension yet. In the Sixth Circuit and the District of Columbia Circuit, reverse payment agreements are per se unlawful under the Sherman Act.[4] However, the Second Circuit, like the Eleventh Circuit, refused to assess the ex post validity of the patent at trial, but instead the court held that the question is whether “the exclusionary effects of the agreement exceed the scope of the patent’s protection.”[5] In devising a test that can better serve both interests, per se rules are unlikely to accommodate such a goal. However, with a growing circuit split among federal courts, in addition to a silent United States Supreme Court (as it passed the opportunity to articulate a unifying a standard at this point in time), the FTC will have many more opportunities to argue for, perhaps better, multi-factored tests.

[1] 15 U.S.C. §45(a)(1) (2006).

[2] U.S. Patent No. 6,503,894 (filed Aug. 30, 2000) (issued Jan. 7, 2003).

[3] F.T.C. v. Watson Pharmaceuticals, Inc., 677 F.3d 1298, 1312 (11th Cir. 2012)

[4] See In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003); see also Andrx Pharmaceuticals, Inc. v. Biovail Corp. Int’l, 256 F.3d 799 (D.C. Cir. 2001)

[5] In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 213 (2d Cir. 2006)

Federal Circuit Clarified Intersection of Patent Misuse and Antitrust

En Banc Court Finds Block Licensing Of Essential and Non-Essential Patents Does No Provide Patent Misuse Defense

In Princo Corp. v. Int’l Trade Comm’n, 2010 U.S. App. LEXIS 18101 (Fed. Cir. August 30, 2010) (en banc), Sony and Philips own patents related to CD-R/RW technology as defined in a standard, the Orange Book standard.  In arriving at this standard, there were competing methods of encoding position information on the disc: The Philips approach, which is outlined in the “Raaymakers patents,” and the Sony approach, which is outlined in the “Lagadec patent.”  Eventually, both Sony and Philips decided on using the Philips approach for the Orange Book standard since the Sony approach was difficult to implement and prone to error.  In order to provide a convenient mechanism for licensing the necessary patents to conform to the Orange Book standard, Philips managed block license packages.   The block license packages included both the Raaymakers patents and the Lagadec patent. Continue reading Federal Circuit Clarified Intersection of Patent Misuse and Antitrust

Federal Circuit Finds Unenforceability for Failure to Disclose Patents to Standards-Setting Organization

In Qualcomm v. Broadcom, 548 F.3d 1004 (Fed. Cir. 2008), Qualcomm is the owner of U.S. Patent Nos. 5,452,104 (“the ‘104 patent”) and 5,576,767 (“the ‘767 patent”).  The ‘104 and ‘767 patents relate to video compression technology.

The Joint Video Team (“JVT”) is a standards-setting organization (“SSO”) which was established in late 2001 as a joint project by two parent SSOs to develop a single “technically aligned, fully interoperable” industry standard for video compression technology. In order to avoid “patent hold-up,” the JVT required participants to disclose and/or give up intellectual property rights (“IPR”) covering a standard. In May 2003, the JVT adopted and published the official H.264 standard.  Qualcomm was a member of the JVT during the development of the H.264 standard, but did not disclose the existence of the ‘104 and ‘767 patents as required by the SSOs.

On October 14, 2005, Qualcomm filed a lawsuit against Broadcom in the United States District Court for the Southern District of California, claiming that Broadcom infringed the ‘104 and ‘767 patents by making products compliant with the H.264 video compression standard. The District Court concluded that Qualcomm breached its duty to disclose the ‘104 and ‘767 patents to the JVT, where these determinations of a duty to disclose were based upon the written JVP IPR policies and the JVT participants’ treatment of the JVT IPR policies. As a remedy, the District Court ordered the ‘104 and ‘767 patents unenforceable against the world, and on both Qualcomm’s JVT misconduct and its litigation misconduct by failing to turn over relevant emails during discovery, the court determined that this was an exceptional case and awarded Broadcom its attorney fees.  Qualcomm appealed the District Court’s decision that it breached its duty to disclose U.S. Patent Nos. 5,452,104 (“the ‘104 patent”) and 5,576,767 (“the ‘767 patent”) to the Joint Video Team (“JVT”) standards-setting organization (“SSO”).

In reviewing the District Court’s judgment, the Federal Circuit addressed whether (1) Qualcomm, as a participant in the JVT, had a duty to disclose patents to the JVT prior to the release of the H.264 standard in May 2003; (2) if so, what was the scope of its disclosure duty; (3) whether Qualcomm breached its disclosure duty by failing to disclose the ‘104 and ‘767 patents; and (4) if so, whether it was within the District Court’s equitable authority to enter an unenforceability remedy based on the equitable defense of waiver in the SSO context.

(1) Existence of a Disclosure Duty

First, as the District Court noted, the Federal Circuit found that the JVT IPR policies identify IPR by JVT participants as critical to the development of an effective industry standard. While the language of the JVT IPR policies may not have expressly required disclosure by all participants in all circumstances, it at least incorporated a best efforts standard for such disclosure.  And as Qualcomm admitted, it did not present evidence of any efforts to disclose patents associated with the standardization proposal to the JVT prior to the release of the H.264 standard.

Besides the disclosure obligations provided in the JVT IPR policies, the Federal Circuit agreed with the District Court that Qualcomm also had disclosure obligations under the rules of the JVT parent organizations. Thus, the Federal Circuit held that even if the written IPR policies did not unambiguously require by themselves the disclosure obligations, the language of the JVT IPR policies coupled with the District Court’s findings and conclusions as to the JVT participants’ understanding of the policies further established that the policies imposed disclosure duties on participants. The Federal Circuit accepted the factual findings of the District Court, noting that the District Court was in the best position to determine the significance and implications of the record testimony in the first instance and that the cited testimony provided sufficient evidentiary support for its findings.

(2) Scope of Disclosure Duty

The District Court, relying on Rambus, Inc. v. Infineon Technologies AG, 318 F.3d 1081 (Fed. Cir. 2003), found that Qualcomm was required to disclose any patent that “reasonably might be necessary” to practice the standard.  Qualcomm argued that this standard was too broad, and that a patent must actually be necessary to practice the H.264 standard in order to trigger the disclosure duty.  However, the Federal Circuit found that this interpretation was contrary to the plain language used in Rambus.  Furthermore, in Rambus, The Federal Circuit noted that it explained the “reasonably might be necessary” standard by stating that “the disclosure duty operates when a reasonable competitor would not expect to practice the standard without a license under the undisclosed claims” and clarified that the standard is objective and “does not depend on a member’s subjective belief that its patents do or do not read on the proposed standard.” Id. at 1100-01, 1104. Thus, the Federal Circuit agreed with the District Court’s determination that the language required JVT participants to disclose patents that “reasonably might be necessary” to practice the H.264 standard.

(3) Breach of Disclosure Duty

It was undisputed that Qualcomm did not disclose the ‘104 and ‘767 patents to the JVT prior to the release of the H.264 standard, so Qualcomm breached its disclosure duty if the ’104 and ‘767 patents “reasonably might be necessary” to practice the H.264 standard. The Federal Circuit found that the District Court did not err in finding clear and convincing evidence that the ‘104 and ‘767 patents fell within the “reasonably might be necessary” standard and thus properly determined that Qualcomm breached its disclosure duty by failing to disclose the ‘104 and ‘767 patents to the JVT prior to the release of the H.264 standard in May 2003.

(4) Equitable Remedies

The District Court analyzed the consequence of Qualcomm’s failure to disclose the ‘104 and ‘767 patents under the framework of waiver as a consequence of silence in the face of a duty to speak. Under the waiver doctrine, the failure to disclose the ‘104 and ‘767 patents rendered the patents unenforceable since the actions waived the right to enforce the ‘104 and ‘767 patents. The parties disagreed as to whether waiver was the appropriate equitable framework and whether the scope of the unenforceability remedy was within the District Court’s equitable authority. Qualcomm argued that the District Court’s findings did not constitute waiver as a matter of law, arguing that “true waiver” requires a voluntary or intentional relinquishment of a known right. Specifically, Qualcomm claimed that the District Court’s findings in this case ran directly contrary to any claim that Qualcomm intended to voluntarily waive its patent rights. The Federal Circuit agreed with Qualcomm on this point because the District Court’s findings demonstrated that Qualcomm, rather than relinquishing its rights, intentionally organized a plan to shield its patents from consideration by the JVT, intending to later obtain royalties from H.264 compliant products. For this reason, it appeared that “true waiver” was not the appropriate framework.

However, the Federal Circuit also reviewed whether an implied waiver had occurred.  As to implied waiver, Qualcomm argued that, “even if Broadcom had proven an intentional breach of the JVT disclosure duty, waiver could be inferred only if Qualcomm knew that nondisclosure alone would (with no detrimental reliance by any party) necessarily result in the loss of those rights.” The Federal Circuit again noted that Qualcomm knew JVT participants treated the JVT policies as imposing a duty, that it knew the asserted patents “reasonably might be necessary” to practice the H.264 standard and that it intentionally shielded the patents from consideration by the JVT, which demonstrated that Qualcomm had sufficient awareness of the relevant circumstances. The Federal Circuit found that the District Court’s findings were sufficient to support the application of an implied waiver defense.

Qualcomm argued that equitable estoppel, rather than waiver, in appropriate circumstances is the proper remedy for breach of SSO disclosure duties but because Broadcom chose not to pursue equitable estoppel at trial, it was foreclosed from raising equitable estoppel on appeal because it did not cross-appeal the preclusion of that defense. In actuality, the equitable estoppel defense had not been permitted due to Qualcomm’s false factual assertions in opposition to Broadcom’s equitable estoppel defense and its withholding of evidence of its JVT participation for which Qualcomm had been sanctioned by the District Court. The Federal Circuit, therefore, noted that the deficiencies in Broadcom’s pleadings were caused, in significant measure, by Qualcomm’s failure to disclose its participation in the H.264 standard-setting process, and under these circumstances, deficiencies in Broadcom’s pleadings should not permit Qualcomm to escape the consequences of its malfeasance. Furthermore, a cross-appeal would have been improper here because the alternative doctrine of equitable estoppel would not enlarge the judgment relative to the doctrine of waiver relied upon by the District Court. The Federal Circuit concluded that Broadcom properly raised equitable estoppel as an alternative ground to uphold the judgment, rather than a cross-appeal.

Qualcomm also argued that the remedy of unenforceability entered on Broadcom’s defense of waiver was contrary to law, arguing that because waiver was pled as an affirmative defense, it could not result in a judgment of unenforceability. The Federal Circuit disagreed, finding it entirely appropriate for the District Court to address the defense of waiver after the jury returned a non-infringement verdict. Qualcomm was correct that patent misuse does not render a patent unenforceable for all time, but the limited scope of unenforceability does not necessarily mean that an unenforceability remedy is unavailable in the waiver context in this case. In appropriate circumstances, the District Court may order patents unenforceable as a result of silence in the face of an SSO disclosure duty, as long as the scope of the District Court’s unenforceability remedy is properly limited in relation to the underlying breach. The Federal Circuit vacated the unenforceability remedy and remanded with instructions to enter an unenforceability remedy limited in scope to any H.264-compliant products.

Finally, Qualcomm argued that the District Court should not have awarded Broadcom attorney fees under the “exceptional cases” standard of 35 U.S.C. § 285 because the determination was based in part on Qualcomm’s JVT-related activities. The Federal Circuit, however, found that Qualcomm’s arguments did not show that the District Court’s findings were clear error. The litigation misconduct findings were sufficient standing alone to support the exceptional case determination here, and in the circumstances of the present case, it was not error for the District Court to additionally consider the related JVT misconduct, which was an important in understanding and evaluating the litigation misconduct.

Significance to Patent Owners

In Qualcomm, the Federal Circuit clarified the remedy available where a patent owner or applicant participates in a standard setting organization.  In interpreting Rambus, Inc. v. Infineon Technologies AG, 318 F.3d 1081 (Fed. Cir. 2003), the Federal Circuit did not rely on the mere IPR policy in place, and looked to extraneous disclosure requirements (including implied in fact contractual requirements) to show that Qualcomm was required to disclose its patent despite a vaguely worded IPR policy.  Further, the Federal Circuit provided additional information on the appropriate remedy for a failure to disclose, which is limited to a waiver of right to enforce the patent against technologies within the standard.  As such, the Federal Circuit clarified that while it is willing to award equitable relief against a non-disclosing patent owner based on the totality of the evidence, the waiver of the enforcement right for non-disclosure is limited and does not affect the entire scope of the patented invention.